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CEO power and how companies respond to a crisis

In a period of tremendous change, as typified by what is increasingly called the 4th Industrial Revolution, you could argue that organizations exist in a state of permanent crisis, but clearly some crises are bigger than others. Such circumstances require a speed and breadth of response that marks them out as different.

A recent study from UT Dallas set out to explore the way the power of a CEO within an organization influenced the chances of success of any crisis management efforts.

“We wanted to look at crisis situations in which urgency — the speed of making a decision — could potentially be really important,” the authors say. “We look at severe industry downturns. The essential idea is, when you have concentrated power in the hands of the CEO or a small group of decision-makers, does that lead to better decision-making or worse?”

Powerful bosses

Ordinarily, having power tightly concentrated in the hands of one person (the CEO) is regarded as harmful to the company, but does this concentration help the company respond quickly and purposefully to a crisis?

The researchers pooled a range of data from publicly traded firms, including their share price and board of director over the period from 1992 to 2009. The power of the CEO was gauged by examining things such as whether the CEO was also the chairman or the ratio of CEO pay and pay of other executives at the company.

When the data was crunched, it revealed that when innovative companies experienced a downturn in their industry, they fared much worse after such a downturn if they had a powerful CEO. This also emerged in competitive and high-discretion industries.

The researchers suggest that whilst powerful bosses might make faster decisions, the lack of thought diversity and external input tends to make those decisions poorer ones.

Open for the win

A better strategy, the authors believe, is to keep communication and information channels as open as possible. Indeed, urgency should be no excuse to sacrifice the hunt for the best information possible.

“CEOs can actually benefit from having a board of independent members, or having different voices in the boardroom,” they conclude. “That can lead to better decision-making. It would be positive for the firm to view it from that perspective. Many of them do, but there are always people who want more power and more authority, and don’t want to have people looking over their shoulder. On the other hand, that may be what helps a firm deal with a crisis.”